Rational Producer Behaviour Flashcards

Flashcards based on lecture notes about Rational Producer Behavior.

Market Power

The ability of a company to change the price of its products or services.

Perfect Competition

A market structure that allows multiple companies to sell the same product or service.

Monopolistic Competition

A market structure where a certain product or service is offered by only one company.

Monopoly

A market structure where one firm produces and sells a given product or service.

Allocative Efficiency

When resources are used in a way that best satisfies people's wants and needs.

Profits

Total Revenue (TR) - Total Cost (TC)

Total Revenue (TR)

Price x Quantity

Total Cost (TC)

Total Fixed Cost (TFC) + Total Variable Cost (TVC)

Marginal Cost (MC) = Marginal Revenue (MR)

Firms will always supply Q when MR = MC

Average Revenue (AR)

Price (P)

Average Cost (AC)

TC / Q

AR > AC

Abnormal profit. More revenue is generated than necessary to cover the expenses of production

AR = AC

Normal profit. Revenue just covers all expenses

AR < AC

The firm has made a loss. Happens in short run, but is unsustainable in the long run

Perfect Competition Characteristics

Many firms, Undifferentiated products, No barriers to entry, No market power, Firms are price takers

Normal Profit Condition

Cost = Revenue

Loss Condition

Cost > Revenue

Abnormal Profit Condition

Cost < Revenue

Normal Profit Definition

Profit = R - C, which is 0

Perfect Competition State

In the long run, any abnormal profit or loss will revert to normal profit

Loss in Perfect Competition Short Run

Cost per item is higher than its revenue which means the profit is negative

Loss in Perfect Competition Long Run

Firms exit, market price increases, Long run losses correct into normal profit

Abnormal Profit Short Run

Cost per item is lower than its revenue means profit is positive

Abnormal Profit Long Run

More firms enter the market, the price will decrease, long run abnormal profit corrects into normal profit

Allocative Efficiency Occurs When

The output of goods and services match the social optimum amount, P = MC

Perfect Competition and Allocative Efficiency

Perfect competition is a derided scenario in many markets, as it means the amount of products produced will exactly match what is best for the society, at the best price for both consumers and producers

Monopolistic Competition Characteristics

Quite a few firms, Slightly differentiated products, Some barriers to entry, Little market power, Firms are price makers

Monopolistic Competition Default

The default state is always normal profits. This is because in perfect competition, firms can enter or exit if abnormal profit or losses are made

Normal Profit (Monopolistic competition)

At this point we see AC is same as AR, This means the cost power item is the same as it Revenue

Abnormal Profit Short Run (Monopolistic competition)

Cost per unit is lower than its revenue, there is a positive profit

Abnormal Profit Long Run (Monopolistic competition)

More firms enter the market, the price will decrease, abnormal corrects into normal profit

Loss Monopolistic Short Run

Cost per item is higher than revenue, Profit = R - C, so it is a negative profit. Since firms makes losses some will exit the market

Loss Monopolistic Long Run

Some firms exit market, the price will increase, losses current into normal profit

Allocative Efficiency (Monopolistic competition)

The firms in monopolistic competition are price makers, they proceed less than what is optimal for society

Monopolistic Competition vs Monopoly efficiency

A monopolistic competition has less efficient than a monopoly

Monopoly Characteristics

One dominant firm, Very differentiated product, Very high barriers to entry, Significant market power, Firm is a price maker

Monopoly Normal Profit

Cost per item is the same as revenue, Profit is 0, which is normal profit

Monopoly Loss

Cost per item is higher than its revenue, Profit = negative, which makes it a loss

Monopoly Abnormal Profit

Cost per item is lower than its revenue, Profit is positive, which is abnormal profit

Market Failure (Monopoly)

A monopoly causes market failure, as they produce less of a product than what is optimal for society (not allocatively efficiency)

Monopoly profit maximizing point

Because they are profit maximizing, they prove where MR = MC. However, the social optimum is where MC = AR